Has gold lost its Midas touch for good?

Commentary: Both the yellow metal and gold miners are tarnished

HowardGold

NEW YORK (MarketWatch) — Gold was a quiet winner before its big sell-off this week.

The yellow metal had worked its way up from around $1,560 an ounce back in July to almost $1,800 in October. Just last week it changed hands at $1,750.

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But then came waves of selling, which drove the price below $1,690 by Thursday morning, still slightly above support levels.

But gold has gone nowhere in more than a year. It peaked near $1,900 in September 2011 and hasn’t come within $100 of that since. It fell as low as $1,540 in May. Though it’s still up around 8% in 2012, this year’s rally is looking pretty shaky.

And U.S. stocks, which so many investors still hate, have wiped the floor with gold. Since Sept. 22, 2011, when stocks and gold began to decouple, the Standard & Poor’s 500 index has risen 25% while SPDR Gold Shares ETF
GLD, +0.63%
has lost 3%.

Karat and stick

So, what’s next for gold?

Back in March, I wrote a column called “End of the Gold Bull on the Horizon,” in which I laid out a scenario where gold, well, just wouldn’t shine:

But some big things have happened since then. On September 6th, European Central Bank President Mario Draghi indicated the ECB would start unlimited buying of European government bonds with maturities of one- to three years. The program was aimed at backstopping the debt of fragile euro zone countries such as Spain and Italy.

And the following week (what a coincidence!) Federal Reserve chairman Ben Bernanke announced the U.S. would embark on its own open-ended bond-buying plan, QE3. The Fed pledged to purchase an additional $40 billion of mortgage-backed securities each month until it saw “ongoing sustained improvement in the labor market.”

“I think in the next year we’ll see the $2,000 mark and the gold cycle [won’t be] over until we see the $2,400 mark.” That’s the inflation-adjusted 1980 high of more than $800 an ounce, he said.

Groh’s fund owns some physical gold but mostly gold mining stocks. “Investors should have [gold exposure] through a number of vehicles,” he said.

Gold mining stocks have lagged gold badly, especially as SPDR Gold Trust, one of the biggest ETFs of all, “has democratized owning gold” and thus diminished the appeal of the miners for individual and institutional investors alike. (Full disclosure: Family members and I own small positions in SPDR Gold Trust and Market Vectors Gold Miners ETF
GDX, +2.15%
.)

Mining companies are beset by high operating and capital costs, as well as scarce labor and greedy governments looking for a piece of the action, Groh added.

But the XAU, the Philadelphia Stock Exchange Gold and Silver Index
XAU, +1.98%
, now trades at less than 10% of the price of gold, well below the average of 13%-14%. “When it’s on that level, it does signify a value proposition,” Groh said.

Of course, it’s only a value proposition if you think gold prices will rise, and that’s looking iffy now.

Gold’s relative weakness in what’s usually its strongest season isn’t a good sign. But a successful resolution of the “fiscal cliff” stand-off may be a boon for all risk assets, depending on how it’s structured. (Read Howard’s take on how the president and the GOP could “split the difference” on the fiscal cliff at The Independent Agenda.)

So I’m holding on to a small gold position (5% of my investable assets) and waiting to see how far the sell-off goes. If gold stabilizes in the low to mid-$1,600s I might buy a little more, but not much. The big decade-long bull market in gold may be in its last innings, but I wouldn’t mind a little more cheap insurance in case the game goes on a little longer.

Howard R. Gold is a columnist for MarketWatch and editor at large for MoneyShow.com. Follow him on Twitter @howardrgold and catch his coverage of the fiscal cliff, politics and economics at www.independentagenda.com.

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